Midwest Packaging\'s ROE last year was only 6%; but its management has developed
ID: 2383695 • Letter: M
Question
Midwest Packaging's ROE last year was only 6%; but its management has developed a new operating plan that calls for a debt-to-assets ratio of 40%, which will result in annual interest charges of $517,000. The firm has no plans to use preferred stock. Management projects an EBIT of $1,067,000 on sales of $11,000,000, and it expects to have a total assets turnover ratio of 2.4. Under these conditions, the tax rate will be 30%. If the changes are made, what will be the company's return on equity? Round your answer to two decimal places.
Explanation / Answer
Sales 11,000,000.00 Asset Turnover 2.40 Sales/Assets = 2.4 Assets = 11,000,000/2.4 Assets = 4,583,333.33 Debt = 40% of assets Debt = 40%* 4,583,333.33 Debt = 1,833,333.33 Equity = Assets - debt Equity = 2,750,000 Statement showing compuation Particulars Amount EBIT 1,067,000.00 Interest 517,000.00 EBT(EBIT - Intt) 550,000.00 Tax @30% 165,000.00 EAT 385,000.00 Equity 2,750,000.00 Return on Equity = EAT/Equity 14.00%